What economic trends are the financial markets expecting in 2006?

Economics Weekly: What economic trends are the financial markets expecting in 2006?

Looking at economic prospects in the year ahead...
With last year’s economic performance proving surprising in some aspects, what are the consensus expectations of forecasters for 2006? We examine these through projections of economic growth, consumer price inflation and short term and long term interest rates for some major economic zones. These include, the US, the euro area, Japan and the UK. (With China overtaking the UK in 2005 as the world’s fourth largest economy in terms of market exchange rates, it is likely that analysis such as this will have to start taking it into account, especially in view of the global economic impact of its fast import growth, reckoned likely to be some 25-30% in 2006).

To summarise last year, economic growth in the US and Japan outperformed expectations but the UK and euro area economies underperformed. Whilst Japan still experienced falling prices or deflation, it only fell 0.1% more than expected; in the US inflation was 0.9 percentage points greater than the consensus. Inflation was 0.4% more than expected by forecasters for the UK in 2005 and was 0.2% higher than predicted for an underperforming euro zone economy. With faster growth and higher inflation it was not surprising that US short term interest rates turned out 0.6% higher than predicted, even though bond yields turned out to be 0.6% less than projected. The latter seems either a testament to the lack of investment opportunities outside of the US or that risk premiums fell during 2005. But bond yields were lower than expected in all the economies in the charts, so implies that a global change in investors risk perceptions occurred. Interest rates were 0.4% lower than expected in the UK at 4.5% but spot on for the euro zone at 2.5% (based on the 3m offer rate).

What about growth expectations?
An interesting point from chart a is that global economic growth is not expected to slow but to accelerate slightly in 2006. However, the pattern does change. US economic growth is expected to slow, though only slightly, but growth is seen to accelerate to nearly 2% in the euro area. Growth in Japan is expected to slow, to 2% from a faster than expected 2.4% in 2005. UK growth is also expected to accelerate, but only modesty from 1.7% in 2005 to 2.1% in 2006. This pattern implies that the emerging markets once again remain the fastest growing economies in the world, led by China.

interest rates in 2006Global inflation expected to rise only modestly in 2006…
Despite the continuation of strong global growth into 2006, world inflation is expected to be only mildly higher, see chart b. This is likely due to the global deflationary effect of the faster growing emerging markets but inflation in the US is also expected to slow, though only by 0.4% to 3% from a 3.4% rate in 2005. In the UK and euro zone, inflation is expected to be modestly higher. For the first time in about a decade, inflation in Japan is expected to be positive.

…so short term interest rate rises are expected to be small…
With higher inflation last year in the US and faster growth, it is no surprise that short term interest rates are predicted to be higher, chart c. But, in the UK, the current view is that modest growth will still result in lower interest rates, even though inflation is just above the 2% inflation target, presumably because growth is below the long run average. For the euro area, short term interest rates are predicted to be higher, as is the case for Japan, though only to a rate of 0.3%.

...helping to keep down long term interest rates
On the whole, long term interest rates , shown in chart d, are reflecting that global inflation is expected to be very modest, with only a mild upward sloping curve (short term interest rates compared with long term rates) of 0.3% to 0.6% in 2006. This may seem a surprisingly sanguine view to take in view of longer term historical experience and it may seem a good bet to look for an upward inflation and interest rate surprise. But the financial markets are noting that despite a positive oil price shock in 2005 inflation remained low, so with a fall in oil prices likely to push inflation lower this year, it is likely to remain fairly muted. However, a lot of good news seems to be expected for 2006, looking at the modest changes in short term and long term interest rates compared with last year’s closing levels. If 2005 was anything to go by, 2006 is likely to be a more volatile year than forecasts are suggesting.

Any documentation, reports, correspondence or other material or information in whatever form be it electronic, textual or otherwise is based on sources believed to be reliable, however neither the Bank nor its directors, officers or employees warrant accuracy, completeness or otherwise, or accept responsibility for any error, omission or other inaccuracy, or for any consequences arising from any reliance upon such information. The facts and data contained are not, and should under no circumstances be treated as an offer or solicitation to offer, to buy or sell any product, nor are they intended to be a substitute for commercial judgement or professional or legal advice, and you should not act in reliance upon any of the facts and data contained, without first obtaining professional advice relevant to your circumstances. Expressions of opinion may be subject to change without notice. Although warrants and/or derivative instruments can be utilised for the management of investment risk, some of these products are unsuitable for many investors. The facts and data contained are therefore not intended for the use of private customers (as defined by the FSA Handbook) of Lloyds TSB Bank plc. Lloyds TSB Bank plc is authorised and regulated by the Financial Services Authority and is a signatory to the Banking Codes, and represents only the Scottish Widows and Lloyds TSB Marketing Group for life assurance, pension and investment business.

Forex Trading News

Forex Research

Daily Forex Market NewsForex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
here.

Forex NewsReal-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."

Veteran FX Trader, Max McKegg, forecasts all the Major currencies and the Australasians; providing Daily and Medium Term Trading forecasts to subscribers, who include large Banks the world over, as well as individual traders in more than 30 different countries.

Are you
looking for your first broker or do you need of a new one? There are
more critical things to consider than you might have thought.

We were trading long before there were online brokers. Global-View
has been directly involved with the industry since its infancy. We've
seen everything and are up-to-data with recent regulatory changes.

Forex Forum

The Global-View Forex Forum is the hub for currency trading on the web. Founded in 1996, it was the original forex forum and is still the place where forex traders around the globe come 24/7 looking for currency trading ideas, breaking forex news, fx trading rumors, fx flows and more. This is where you can find a full suite of forex trading tools, including a complete fx database, forex chart points, live currency rates, and live fx charts. In addition, there is a forex brokers directory where you can compare forex brokers. There is also a forex brokers hotline where you can ask for help choosing a forex broker that meets your individual fx trading needs. Interact on the same venue to discuss forex trading.

Forex News

The forex forum is where traders come to discuss the forex market. It is one of the few places where forex traders of all levels of experience, from novice to professionals, interact on the same venue to discuss forex trading. There is also the GVI Forex, which is a private subscription service where professional and experienced currency traders meet in a private forex forum. it is like a virtual forex trading room. This is open to forex traders of all levels of experience to view but only experienced currency tradingprofessionals can post.

Currency Trading

Currency trading charts are updated daily using the forex trading ranges posted in the Global-View forex database. You will also find technical indicators on the fx trading charts, e.g. moving averages for currencies such as the EURUSD. This is another forex trading tool provided by Global-View.com.

Forex Brokers

The forex database can be used to access high, low, close daily forex ranges for key currency pairs, such as the EURUSD, USDJPY, USDCHF, GBPUSD, USDCAD, AUD, NZD and major crosses, including EURJPY, EURGBP, EURCHF, GBPJPY, GBPCHF and CHFJPY. Data for these currency trading pairs dating back to January 1, 1999 can be downloaded to an Excel spreadsheet.

Forex Trading

Forex chart points are in a currency trading table that includes; latest fx tradinghigh-low-close range, Bollinger Bands, Fibonacci retracement levels, daily forex pivot points support and resistance levels, average daily forex range, MACD for the different currency trading pairs. You can look on the forex forum for updates when one of the fx trading tools is updated.

FX Trading

Global-View also offers a full fx trading chart gallery that includes fx pairs, such as the EURUSD, commodities, stocks and bonds. In a fx trading world where markets are integrated, the chart gallery is a valuable trading tool. Look for updates on the Forex Forum when the chart gallery is updated.

Forex Blog

Global-View.com also offers a forex blog, where articles of interest for currency trading are posted throughout the day. The forex blog articles come from outside sources, including forex brokers research as well as from the professionals at Global-View.com. This forex blog includes the Daily Forex View, Market Chatter and technical forex blog updates. In additional to its real time forex forum, there are also Member Forums available for more in depth forex trading discussions.

WARNING: FOREIGN EXCHANGE TRADING AND INVESTMENT IN DERIVATIVES
CAN BE VERY SPECULATIVE AND MAY RESULT IN LOSSES AS WELL AS PROFITS. FOREIGN
EXCHANGE AND DERIVATIVES TRADING IS NOT SUITABLE FOR MANY MEMBERS OF THE
PUBLIC AND ONLY RISK CAPITAL SHOULD BE APPLIED. THE WEBSITE DOES NOT TAKE
INTO ACCOUNT SPECIAL INVESTMENT GOALS, THE FINANCIAL SITUATION OR SPECIFIC
REQUIREMENTS OF INDIVIDUAL USERS. YOU SHOULD CAREFULLY CONSIDER YOUR FINANCIAL
SITUATION AND CONSULT YOUR FINANCIAL ADVISORS AS TO THE SUITABILITY TO YOUR
SITUATION PRIOR TO MAKING ANY INVESTMENT OR ENTERING INTO ANY TRANSACTIONS.